Banking index slips on inflation worries; ICICI, HDFC, Axis down

NEW DELHI: The BSEBanking Index slipped over 1% Monday after higher-than-expected April inflation numbers ruled out hopes of a moderation in the monetary cycle by the Reserve Bank of India (RBI).

With the Wholesale Price Index (WPI) accelerating to unexpected levels of 7.23 percent in April, many analysts are of the view that the RBI has limited room to cut the key interest rates in its monetary policy review.

Leif Eskesen, Chief Economist for India and ASEAN, HSBC, said today's inflation number underscores the point that the RBI has limited room to cut monetary policy rates because it highlights the risks that inflation poses.

"The inflation is more structural in nature, and if the RBI eases rates too much, inflation could flare up," he said.

The WPI for the month of April rose at a higher than expected 7.23 percent versus 6.89 percent in March. The primary articles WPI rose at 9.71 percent versus 9.62 percent in March. Fuel group inflation also showed an upward trend at 11.03 percent versus 10.41 percent in March.

At 01:00 p.m., the Bombay Stock Exchange Banking Index was the largest loser among sectoral indices, down 177 points, or 1.6 percent, followed by the BSE Oil & Gas and the BSE Realty Indices, which were down 1.03 percent and 1 percent, respectively. The benchmark Sensex was trading 0.6 percent lower at 16,201.

Also hitting sentiment was Moody's downgrade of the financial strength ratings (BFSR) of ICICI Bank, HDFC Bank and Axis Bank.

It's a chicken and egg story now with markets going down, dragged by banking stocks. The inflation and IIP news coupled with the falling markets are not helping the situation.

"The higher inflation data released today does not bode well for the banking sector. If we look at the economic growth rate, which is coming down, more and more companies are expected to file for debt restructuring agreements in the near future," Piyush Garg of ICICI Securities, said. "If we have an economic growth rate of around 6 percent for the next couple of years, I fear that a large part of this debt restructuring will get converted into NPAs and will be a big problem for banks," Garg added.